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What Happens If You Don’t Pay Your Taxes on Time
Not paying your taxes by the due date can lead to various consequences, from financial penalties to more serious legal actions. Here’s a comprehensive overview of what happens when you don’t pay your taxes on time.
Immediate Consequences
Penalties and Interest
When you fail to pay your taxes on time, the IRS imposes both penalties and interest:
Taxpayers who owe tax and don’t file on time may be charged a failure-to-file penalty. This penalty is usually 5 percent of the tax owed for each month or part of a month that the tax return is late, up to 25 percent. IRS Newsroom – IR-2023-244 – IRS helps taxpayers by providing penalty relief on nearly 5 million 2020 and 2021 tax returns; restart of collection notices in 2024 marks end of pandemic-related pause
The failure-to-pay penalty applies if a taxpayer doesn’t pay the taxes they report on their tax return by the due date or if the taxpayer doesn’t pay the amount required to be shown on their return within 21 calendar days of receiving a notice demanding payment (or 10 business days if the amount is greater than $100,000). IRS Newsroom – IR-2023-244 – IRS helps taxpayers by providing penalty relief on nearly 5 million 2020 and 2021 tax returns; restart of collection notices in 2024 marks end of pandemic-related pause
We charge a penalty when you don’t pay your tax on time. Initially, the penalty is 1/2% of the unpaid tax for each month or part of a month you don’t pay your tax. The penalty can’t be more than 25% of the tax paid late. IRS – Notice 746: Information About Your Notice, Penalty and Interest
Effective for months beginning after December 31, 1999, the failure to pay tax penalty (FTP) for individuals who file a tax return on or before the due date (including extensions), is limited to half the usual rate (0.25% rather than 0.5%) for any month in which an Installment Payment Agreement is in effect. IRS – Notice 746: Information About Your Notice, Penalty and Interest
If we issue a Notice of Intent to Levy and you don’t pay the balance due within 10 days from the date of the notice, the penalty increases to 1% a month. IRS – Notice 746: Information About Your Notice, Penalty and Interest
Interest Charges
The IRS is required by law to charge interest when a tax balance is not paid on time. Interest cannot be reduced due to reasonable cause. Interest is based on the amount of tax owed for each day it’s not paid in full. The interest is compounded daily, so it is assessed on the previous day’s balance plus the interest. Interest rates are determined every three months and can vary based on type of tax; for example, individual or business tax liabilities. IRS Newsroom – IR-2023-244 – IRS helps taxpayers by providing penalty relief on nearly 5 million 2020 and 2021 tax returns; restart of collection notices in 2024 marks end of pandemic-related pause
You will be charged interest on any amount not paid by the regular due date until the date the tax is paid. IRS.gov Tax Topics
The Collection Process
If you don’t pay your tax in full when you file your tax return, you’ll receive a bill for the amount you owe. This bill starts the collection process, which continues until your account is satisfied or until the IRS may no longer legally collect the tax. The first notice you receive will be a letter that explains the balance due and demands payment in full. It will include the amount of the tax, plus any penalties and interest accrued on your unpaid balance from the date the tax was due. IRS.gov Tax Topics
The unpaid balance is subject to interest that compounds daily and a monthly late payment penalty up to the maximum allowed by law. It’s in your best interest to pay your tax liability in full as soon as you can to minimize the penalty and interest charges. IRS.gov Tax Topics
Escalating Enforcement Actions
If you continue to ignore your tax debt, the IRS has several enforcement tools at their disposal:
Tax Liens
If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person. IRC § 6321
Filing a Notice of Federal Tax Lien (NFTL) – An NFTL is a claim against your property that gives public notice to creditors and may harm your credit rating. IRS – Publication 5107: The IRS Collection Process — Your Rights and Responsibilities
Levies and Seizures
If you don’t pay your tax bill or contact the IRS to arrange payments, the IRS may take action to collect what you owe. This can include: Levying or taking your assets – The IRS can take the amount you owe from your wages, bank accounts, Social Security benefits, retirement, or other sources of income. The IRS can also take your car, home, or other property. IRS – Publication 5107: The IRS Collection Process — Your Rights and Responsibilities
Applying your tax refunds – The IRS may apply your federal or state tax refunds to pay down the debt you owe. IRS – Publication 5107: The IRS Collection Process — Your Rights and Responsibilities
When a taxpayer fails to pay any Federal tax liability within 10 days of notice and demand, the IRS may collect the unpaid tax by levy on the taxpayer’s property, pursuant to section 6331. However, before the IRS may proceed with that levy, the taxpayer is entitled to administrative and judicial review. Section 6330(a)(1) provides: No levy may be made on any property or right to property of any person unless the Secretary has notified such person in writing of their right to a hearing under this section before such levy is made. Dawson U.S. Tax Court Opinions: Robert Anson
Criminal Penalties for Willful Failure
In severe cases, particularly for those who are required to collect taxes (like employers):
Any person required under this title to collect, account for, and pay over any tax imposed by this title who willfully fails to collect or truthfully account for and pay over such tax shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, shall be fined not more than $10,000, or imprisoned not more than 5 years, or both, together with the costs of prosecution. IRC § 7202
Options If You Can’t Pay
If you’re unable to pay your taxes in full, you have several options:
Payment Plans
If you can’t pay in full, you should send in as much as you can with the notice and explore other payment arrangements. If you’re not able to pay your balance in full immediately, you may qualify for a payment plan. One option is a short-term payment plan of up to 180 days, available for individual taxpayers who owe less than $100,000 in combined tax, penalties, and interest. IRS.gov Tax Topics
If you cannot pay immediately or within 180 days, you may qualify to pay monthly through an installment agreement. You can apply for a payment plan online or you may complete Form 9465, Installment Agreement Request and mail it in with your bill. You may also request an installment agreement over the phone by calling the phone number listed on your balance due notice. IRS.gov Tax Topics
There’s a user fee to set up an installment agreement. For low-income taxpayers, the user fee is reduced and possibly waived or reimbursed if certain conditions apply. Interest and late payment penalties up to the maximum allowed by law will continue to accrue while you make installment payments. IRS.gov Tax Topics
Currently Not Collectible Status
What if I can’t pay at all? If the IRS agrees that you can’t pay, it may suspend collection action and classify your account as currently not collectible. IRS – Publication 5107: The IRS Collection Process — Your Rights and Responsibilities
Offer in Compromise
You also may qualify for an offer in compromise, where the IRS agrees to accept less than the full amount you owe, as long as you comply with your other tax obligations. IRS – Publication 5107: The IRS Collection Process — Your Rights and Responsibilities
The IRS charges most taxpayers a fee for setting up an installment agreement or requesting an offer in compromise, and interest and penalties still accumulate while you’re making payments. IRS – Publication 5107: The IRS Collection Process — Your Rights and Responsibilities
Reasonable Cause Exception
In some cases, you may be able to have penalties (but not interest) abated if you can demonstrate reasonable cause:
If the taxpayer exercised ordinary business care and prudence and was nevertheless unable to file the return within the prescribed time, then the delay is due to a reasonable cause. A failure to pay will be considered to be due to reasonable cause to the extent that the taxpayer has made a satisfactory showing that he exercised ordinary business care and prudence in providing for payment of his tax liability and was nevertheless either unable to pay the tax or would suffer an undue hardship (as described in § 1.6161-1(b) of this chapter) if he paid on the due date. Tresuary Reg. 301.6651-1
Like the addition for failure to file timely, this addition will not be applied when a taxpayer demonstrates that his failure to pay resulted from reasonable cause and not willful neglect. § 6651(a)(2). A failure to pay may be considered due to reasonable cause to the extent the taxpayer has exercised ordinary business care and prudence in providing for payment of his tax liability but was nevertheless unable to pay the tax on the date due or would otherwise suffer an undue hardship. Dawson U.S. Tax Court Opinions: Tyrone Burnett
What You Should Do
The worst thing you can do is nothing at all. If you do not pay or make other arrangements with the IRS, the IRS may take action to collect the money. No matter what, you should still file future tax returns on time and pay as much as you can to reduce penalties and interest. IRS – Publication 5107: The IRS Collection Process — Your Rights and Responsibilities IRS – Publication 5107: The IRS Collection Process — Your Rights and Responsibilities
The notice you received from the IRS should provide contact information for the department you should deal with. Call the IRS at the number on the letter the IRS sent you or at 1-800-829-3903. You’ll need to give the IRS complete financial information, so before you call, make a list of your monthly expenses and income, and be prepared to discuss them. IRS – Publication 5107: The IRS Collection Process — Your Rights and Responsibilities IRS – Publication 5107: The IRS Collection Process — Your Rights and Responsibilities
Conclusion
Not paying your taxes on time can lead to significant financial consequences through penalties and interest. If left unaddressed, it can escalate to more serious enforcement actions like liens, levies, and even criminal charges in extreme cases.
The best approach is to file your return on time even if you can’t pay, pay as much as you can afford, and proactively work with the IRS to establish a payment arrangement for the remainder. Remember that while penalties may be abated for reasonable cause, interest generally cannot be reduced and will continue to accrue until the tax is paid in full.
If you’re facing financial hardship, don’t ignore the problem—reach out to the IRS to discuss your options, as they have several programs designed to help taxpayers who are struggling to pay.